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Vol.1 No. 6, June, ISSN 2277 3622
Online Available at indianresearchjournals.com
FINANCIAL INCLUSION IN INDIA: AN ANALYSIS
*DR. ANURAG B. SINGH, **PRIYANKA TANDON
*Associate Professor, Department of Management Studies, LDC Institute of Technical Studies, Allahabad (Uttar Pradesh), India **Assistant Professor, LDC Institute of Technical Studies, Milestone, Soraon Allahabad
ABSTRACT More than 150 million poor people have access to collateral-free loans .However; there are still large sections of the world population that are excluded from the financial services market. In India half of the poor are financially excluded from the country's main stream of the banking sector. Still in India 22 percent of the people are living below the poverty line. Their monthly income is less than $1 per day and they are living in most un-liveable conditions. In India, growth with equity has been the central objective right from the inception of the planning process. The eleventh Five year plan (2007-12) re-emphasized the need for a more inclusive growth in order to ensure that the per capita income growth is broad- based. More and more Indian companies are trying to enter in the list of fortune 500 and one of our Indian entrepreneurs appears in the list of the top five richest persons of the world. The paper discuss about tackling this disparity between people by ways of financial inclusion through micro finance models and it also analyses how that leads to the economic development of a country. Keywords: Financial Inclusion, SHGs, MFIs, Index of Financial (IFI), Micro Finance, Poverty Alleviation,
INTRODUCTION The causality between economic growth, financial deepening and financial inclusion has been well recognized in India's development strategy, particularly since the reforms of the early 1990s.However an accelerated effort through targeted interventions has been a more recent story. The eleventh five year plan (2007-12) of the Government of India has further emphasized the initiatives of financial inclusion with its greater focus on "inclusive growth". The farming ,micro, small and medium enterprises have immense potential to play a critical role in achieving the objective of faster and more inclusive growth as these sectors contribute to output and employment generation in a significant way with capacity to expand regionally diversified production and generating widely dispersed off farm employment. Access to finance, especially by the poor and vulnerable groups is a prerequisite for employment, economic growth, poverty reduction and social cohesion. Further, access to finance will empower the vulnerable groups by giving them an opportunity to have a bank account, to save and invest, to insure their homes or to partake of credit, thereby facilitating them to break the chain of poverty. The banking industry in India has recognized this imperative and has undergone certain fundamental changes over the last two decades. Reforms since the early nineties in the banking sector have facilitated increasing competition, the development of new generation private sector banks as well as technological breakthrough in diverse financial products, services and delivery channels. With the recent developments in technology, both delivery channels and access to financial services have transformed banking from the traditional brick-and-mortar infrastructure like staffed branches to a system supplemented by other channels like automated teller machines (ATM), credit / debit cards, internet banking, online money transfer, etc. The moot point, however, is that access to such technology is restricted only to certain segments of the society. Indeed, some trends, such as increasingly sophisticated customer segmentation technology - allowing, for example, more accurate targeting of sections of the market - have led to restricted access to financial services for some groups. There is a growing divide, with an increased range of personal finance options for a segment of high and upper middle
those living on low incomes. has become an issue of worldwide concern. the definitions have witnessed as shift in emphasis from the earlier ones. Financial Inclusion is generally defined in terms of exclusion from the financial system. particularly. cannot access mainstream financial products such as bank accounts.e. So far. 42 . Building an inclusive financial sector has gained growing global recognition bringing to the fore the need for development strategies that touch all lives. thus. developing and developed nations. financial advisory services. published articles. Research methodology explains and chooses the best (in terms of quality and economy) way of doing it. This is termed "financial exclusion". By providing these services. remittances and payment services. the term financial inclusion has gained argument among professionals. instead of a select few.savings." OBJECTIVES OF THE STUDY • To review the present status of the financial inclusion in India in particular and the world general. The information and data for the research can be collected through primary as well as secondary sources i. There is no universally accepted definition of financial inclusion. relevant equally in economies of the underdeveloped. The financial system has to provide its function of transferring resources from surplus to deficit units but both deficit and surplus units are those with low incomes. ANURAG B. reports. • To highlight how the micro finance models are useful to increase Financial Inclusion. to a wider definition covering access to and use and understanding of products and services. which defined financial inclusion and exclusion largely in terms of physical access. These people. insurance facilities. Data has been collected from the websites of the Reserve Bank of India and also taken from various committee reports submitted to Government of India on Financial Inclusion. credit. SINGH. "Financial inclusion." Various graphs and tables have been used. journals. payments etc. The working or operational definitions of financial exclusion generally focus on ownership or access to particular financial products and services . etc. In its landmark research work titled "Building Inclusive Financial Sectors for Development"1 (2006)." The financial services include the entire gamut . METHODOLOGY OF THE STUDY Secondary research was conducted to review the present status of financial inclusion in India. insurance.Furthermore. loans. low cost credit. FINANCIAL INCLUSION: AN OVERVIEW More recently. PRIYANKA TANDON income population and a significantly large section of the population who lack access to even the most basic banking services. the Blue Book says. news papers. to insurance for all insurable people and firms and to savings and payments services for everyone. Rangarajan's committee on financial inclusion defines it as: "Financial inclusion may be defined as the process of access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. would provide access to credit for all "bankable" people and firms. • To highlight the measures taken by the Government of India and RBI for promoting financial Inclusion. the focus has only been on delivering credit (it is called as microfinance but is microcredit) and has been quite successful. poor background etc. the aim is to help them come out of poverty.DR. "Financial Inclusion" focuses attention on the need to bring previously excluded people under the umbrella of financial institutions. more popularly known as the Blue Book. the United Nations (UN) had raised the basic question: "why are so many bankable people unbanked?"An inclusive financial sector. books and websites.
The policymakers have set up their task force/committees to understand how financial inclusion can be 43 . were important. migrants. remittance facilities. 5. etc. The proportion of the population that uses a bank or bank like institution 2. The earlier research focused on how finance helps an economy.300 or more at the time of transaction. oral lessees. some sparsely populated. The new avenue for research in finance is . NSSO Survey Results The Committee debated the various dimensions of inclusion and concluded that while aspects such as savings. The population which only uses services from information financial service providers 4. In India. It is now attributed as the brain of an economic system and most economies strive to make their financial systems more efficient. Population which uses services from non-bank "other formal" financial institutions. For purposes of this analysis. lack of rural infrastructure. Dublin) in his research developed an index to measure access to finance in 160 countries. 45. The Committee noted that the definition of indebtedness as adopted in the survey referred to farmer households having outstanding loans from institutional or non-institutional sources4 in cash or kind having a value of Rs. research shows that financial inclusion is as important. Some of the important causes of relatively low extension of institutional credit in the rural areas are risk perception. self employed and unorganized sectors enterprises. Percentage of population transacting regularly through formal financial instruments and. Since measuring inclusion is perceived to be difficult. RATIONALE FOR FINANCIAL INCLUSION Finance has come a long way since the time when it wasn't recognized as a factor for growth and development. but does not use bank services 3. It is not implied that financial inclusion alone has led to the development but is an important factor. financial inclusion has generally been defined in terms of exclusion from the financial system. 73% of farm households do not have access to formal credit sources. out of a total of 89. number of bank branches that are generally used as measures of financial inclusion can provide only partial information on the level of financial inclusion in an economy. It also keeps policymakers on their toes as any problem in this sector could freeze the entire economy and even lead to a contagion. cost of its assessment and management. insurance. The Committee accordingly scanned the data put out by the NSSO in the situation assessment survey on "Indebtedness of Farmer Households" (2003).9 million farmer households in the country (51. In other words. If the index is put on a world map it can be clearly seen that those economies having higher indices are usually those. ethnic minorities and socially excluded groups. and vast geographical spread of the rural areas with more than half a million villages. It focuses on ownership or access to particular financial products and services. landless labourers.making financial inclusion workable. Patrick Honohan (of Trinity College. Only 27% of total farm households are indebted to formal sources (of which one-third also borrow from informal sources). Specific indicators such as number of bank accounts. The various aspects of such exclusion among specific regions and population groups are indicated below. The population which uses no financial services.FINANCIAL INCLUSION IN INDIA: AN ANALYSIS The access to finance could be divided into four segments: 1. which we term as developed/advanced economies. the financially excluded sections comprise largely marginal farmers.3 million households does not access credit. nevertheless exclusion was particularly germane from the standpoint of access to credit by vulnerable groups. either from institutional or non-institutional sources. senior citizens and women.4%). As per NSSO data. urban slum dwellers. Now. "financially excluded" households will be defined as those not having any debt to formal credit sources.
C. etc. Second. the high costs deter the poor from accessing them. while the wait is only a day in Denmark. These range from people with low income to people with low information and accessibility to people with no social security or insurance cover. 44 . even if financial services are available. The main reasons behind exclusion are: a) Lack of information: Lack of information about the role and function of banks. For example. interest rates. Pakistan. income etc. why can't it find a market of its own? The reasons are: a) Financial Exclusion: It has been found that financial services are used only by a section of the population. to open a checking account in Cameroon. d) Behavioral aspects: Research in behavioral economics has shown that many people are not comfortable using formal financial services. The first question that comes to mind is why can't financial inclusion happen on its own? Why do we need to make a policy to increase the same? Like any other product or service.Rangarajan to suggest measures to increase financial inclusion (hence called the Rangarajan Committee on Financial Inclusion). PRIYANKA TANDON achieved including advanced economies like United Kingdom. The excluded regions are rural. ANURAG B. but only 30 cents in Belgium. poor regions and also those living in harsh climatic conditions where it is difficult to provide these financial services. Philippines. These leads to a vicious cycle. high cost of finance implies that first poor person has to earn much more than someone who has access to lower cost finance. The fees for transferring 250 dollars internationally are 50 dollars in the Dominican Republic. banking services and products. The poor people do not have these documents and thus are excluded from these services. In Bangladesh. the major portion of the earnings is paid to the moneylender and the person can never come out of the poverty. SINGH. The excluded population then hasto relies on informal sector (moneylenders etc) for availing finance that is usually at exorbitant rates. poor infrastructure etc. Annual fees to maintain a checking account exceed 25 percent of GDP per capita in Sierra Leone. various documents and conditions that come with financial services etc. There is demand for these services but it has not been provided.DR. Hence. First. while there are no such fees in the Philippines. WHO ARE THE EXCLUDED AND WHY? Many people across the globe are excluded from mainstream banking. the minimum deposit requirement is over 700 dollars. The World Bank had organized a conference in March 2007 and has released a report titled "Finance for All" in November 2007. an amount higher than the average GDP per capita of that country. b) High cost: It has also been seen that poor living in urban areas don't utilize the financial services as they find financial services are costly and thus are unaffordable. c) Non-price barriers: Access to formal financial services also requires documents of proof regarding a persons' identity. stop people from including themselves in mainstream banking. to get a small business loan processed requires more than a month. while no minimum amounts are required in South Africa or Swaziland. They may also subscribe to the services initially but may not use them as actively as others because of high distance between the bank and residence. The reasons are difficulty in understanding language. India also set up a committee under the chairmanship of Mr.
e. The poor chunk of India's population is based in rural areas. on cheque book issuance etc. on over usage of banking services. Moreover. as most of the commercial banks are located in the vicinity of cities. Figure 1 : An overview of Financial Inclusion Services WHY INCLUSIVE GROWTH? Why inclusive growth now considered essential even to sustain the growth momentum. .FINANCIAL INCLUSION IN INDIA: AN ANALYSIS b) Insufficient documentation: Many people (even in metropolis and urban areas) are unable to show their self identification documents during the opening of a bank account or during taking a loan. 45 . From supply side management. f) Illiteracy: Because of illiteracy. a substantial number of people are unable to take recourse to banking services. c) Lack of awareness: Many people are unaware of the banking terms and conditions laid down from time to time. people in rural areas (mainly in developing countries) have a geographical barrier in accessing banks. The limitations on increasing production and productivity in agriculture are driving migration to urban areas leading to population pressure in urban areas and increase in urban poor. In India. e) Lack of access: Accessibility is a problem from all those people who live in geopolitically isolated regions. 2. Higher growth in agriculture and rural areas coupled with demographic dividend (i. 3. 5. growing proportion of population in the working age group of 15-65 ) will lead to rise in the savings level for financing the increasing level of investments necessary to sustain the overall growth momentum. d) High transaction charges: Various commercial banks across the globe levy transaction charges on credit or debit transactions. 4. The rationale behind the inclusive growth is as under: 1. the requirement of skilled labor is quite substantial in comparison to the present availability. growth in agriculture is necessary in order to keep manufacturing prices under check provide food security and keep inflation under control. the growth process is knowledge based and services led.
Prahalad's words: "If we stop thinking of the poor as victims or as a burden. business finance skills as well as lack of understanding often constraints demand for financial services. This sector has huge potential for growth once there is sufficient investment in infrastructure ensuring linkage to markets and easier access to assets and skills. ANURAG B. Entrepreneurial development has to be encouraged by having an enabling competitive environment and easy availability of finance for newer projects and enterprises. i. PRIYANKA TANDON 6. often overlooking the design of appropriate products for older or younger potential customers. railways. a whole opportunity will open up. ethnic minorities. agriculture. highly mobile people with no fixed or formal address). economic and political refugees and migrant workers from accessing financial services." Thus there are several factors to be considered for inclusive growth. Age Factor Financial service providers usually target the middle of the economically active population. insurgency in a location. small and medium enterprises and 2. rural/urban reconstruction and in social infrastructure such as health care education and sanitation. particularly financial literacy.K. Uppermost among these is the need for raising the allocative efficiency of investment and resources use across different sectors of economy-this can be met by addressing two basic supply-side issues1.e. basic mathematics. Psychological and cultural barriers The feeling that banks are not interested to look into their cause has led to self-exclusion for many of the low income groups . micro. birth certificates or written records often exclude women. factors like density of population.. FACTORS AFFECTING ACCESS TO FINANCIAL SERVICES Gender Issues Access to credit is often limited for women who do not have.. communication. power . rural and remote areas.e.DR. ports. Legal Identity Lack of legal identities like identity cards..However. etc. also affect access to financial services. and start recognizing then as resilient and creative entrepreneurs and value conscious consumers. Place of living Although effective distance is as much about transportation infrastructure as physical distance. cultural and religious barriers to banking have also been observed in some of the country's Social security payments 46 . roads. It is the unorganized non-farm sector that is increasingly absorbing most of the labor force. mobility of the population (i. Limited literacy Limited literacy. or cannot hold title to assets such as land and property or must seek male guarantees to borrow. Effective credit delivery system to facilitate productive investment in employment impacting sectors especially. SINGH. In Professor C. Large scale investment in infrastructural facilities like irrigation.
through bank accounts. Level of Income Financial status of people is always important in gaining access to financial services. particularly in rural areas. According to Report on Currency and Finance 2006-08 the critical dimensions of Financial exclusion include access exclusion. Attractiveness of the Product Both the financial services/products (savings accounts. Extremely poor people find it difficult to access financial services even when the services are tailored for them. It is mandatory for state agencies to make the payments under various social security schemes through bank account. However. Perception barriers and income discrimination among potential members in group-lending programmes may exclude the poorer members of the community. price exclusion and self exclusion because of the fear of refusal to access by the service providers. paved the way for Financial Inclusion. MAJOR MILESTONES IN FINANCIAL INCLUSION IN INDIA 1969 Nationalization of Banks 1971 Establishment of priority Sector Lending Banks 1975 Establishment of Regional Rural Banks 1982 Establishment of NABARD 1992 Launching of the Self Help Groups bank Linkage Programme 1998 NABARD sets a goal for linkage one million SHGs by 2008 2000 Establishment of SIDBI foundation for Micro Credit 2005 One million SHF linkage target achieved three years ahead of date 2006 Committee on Financial Inclusion 2007 Proposed Bill on Micro Finance Regulation introduced in parliament 47 . as directed by the RBI. there are a range of other charges that have a disproportionate effect on people with low income. payment services and insurance) and how their availability is marketed are crucial in financial inclusion. Type of occupation Many banks have not developed the capacity to evaluate loan applications of small borrowers and unorganized enterprises and hence tend to deny such loan requests. transaction is free as long as the account has sufficient funds to cover the cost of transactions made. credit products. The financial exclusion process becomes self-reinforcing and can often be an important factor in social exclusion. Prior to this scheme of 'No frills accounts'. It has increased financial inclusion because it is mandated into the scheme that payments are made through the job cards. especially for communities with limited access to financial products. One of the successes in the last few years is supposed to have been the Mahatma Gandhi National Rural employment Guarantee Scheme. condition exclusion (conditions attached to financial products). Terms and Conditions Terms and conditions attached to products such as minimum balance requirements and conditions relating to the use of accounts often dissuade people from using such products/services.FINANCIAL INCLUSION IN INDIA: AN ANALYSIS Bank charges In most of the countries.
First. In terms of cost to the individuals. Access to a bank account. 1999). higher costs associated with using informal credit. besides all round impediments in basic/minimum transactions involved in earning livelihood. The more tangible outcomes of financial exclusion include cost and security issues in managing cash flow and payments. 2004). ANURAG B. the issue of cost of financial exclusion may be conceived from two angles. credit and insurance are now widely regarded as essential supports for personal financial management and for undertaking transactions in modern societies (Speak and Graham. and long-term or extended dependence on welfare as opposed to savings (Chant Link and Associates. compromised standard of living resulting from lack of access to short-term credit.DR. SINGH. vulnerability to uninsured risks. financial exclusion can impose significant costs on individuals. (iv) difficulty in smoothening income to cope with shocks. financial exclusion leads to higher charges for basic financial transactions like money transfer and expensive credit. exclusion may lead to aggregate loss of output or welfare and the country may not realize its growth potential. the exclusion may have cost for individuals entities in terms of loss of opportunities to grow in the absence of access to finance or credit. families and society as a whole. These include (i) barriers to employment as employers may require wages to be paid into a bank account. Second. which are intertwined. predatory and unregulated providers. It exposes the individual to the inherent risk in holding and storing money . from the societal or the national perspective. According to the Treasury Committee. It could also lead to denial of access to better products or services that may require a bank account. (iii) owning or obtaining assets can be difficult. PRIYANKA TANDON 2008 Committee submitted its final report on Financial Inclusion to Union Finance Minister in January Table 1: Status of financial Inclusion in India COSTS AND CONSEQUENCES OF FINANCIAL EXCLUSION Broadly. increased exposure to unethical. UK (2006). (ii) opportunities to save and borrow can be difficult to access.operating solely on a cash 48 . and day to day living. and (v) exclusion from mainstream society.
self-help groups (SHGs) also meet the financial service requirements of the poorer segments. it is concentrated among the most disadvantaged groups and communities and. Specific financial instruments/products were also developed in order to promote financial inclusion. Second. farmers' clubs. In order to expand the credit and financial services to the wider sections of the population. The announcement of the policy of social control over banks was made in December 1967 with a view to securing a better alignment of the banking system with the needs of economic policy. After Independence. The planning strategy recognized the critical role of the availability of credit and financial services to the public at large in the holistic development of the country with the benefits of economic growth being distributed in a democratic manner. INITIATIVES FOR FINANCIAL INCLUSION IN INDIA India has a long history of banking development. Thus. In recognition of this role. Individuals/families could get sucked into a cycle of poverty and exclusion and turn to high cost credit from moneylenders. urban co-operative banks (UCBs). poverty as well as all the other associated economic and social problems. development of the institutional framework in recent years has focused on new models of expanding financial services involving credit dispensation using multiple channels such as civil society organizations (CSOs). Progress till 1990 Before 1990. Furthermore. it complicates day-to-day cash flow management being financially excluded means households. lack of financial planning and security in the absence of access to bank accounts and other saving opportunities for people in the unorganized sector limits their options to make provisions for their old age.FINANCIAL INCLUSION IN INDIA: AN ANALYSIS basis increases vulnerability to loss or theft. Accordingly. Besides. introduction of priority sector lending norms. several initiatives were undertaken for enhancing the use of the banking system for sustainable and equitable growth. the major focus of the Government and the Reserve Bank was to develop a sound banking system which could support planned economic development through mobilization of resources/deposits and channel them into productive sectors. resulting in greater financial strain and unmanageable debt. Another cost of financial exclusion is the loss of business opportunity for banks. branch licensing norms with focus on rural/semi-urban branches. particularly in the medium-term. These included nationalization of private sector banks. as a result. Banks often avoid extending their services to lower income groups because of initial cost of expanding the coverage which may sometimes exceed the revenue generated from such operations. interest rate ceilings for credit to the weaker sections and creation of specialized financial institutions to cater to the requirement of the agriculture and the rural sectors having bulk of the poor population. At the wider level of the society and the nation. The National Credit Council was set up in February 1968 mainly to assess periodically the demand for bank 49 . Two other factors have often been cited as the consequences of financial exclusion. nongovernment organizations (NGOs). MFIs. the Government's desire to use the banking system as an important agent of change was at the core of most policies that were formulated after Independence. regional rural banks (RRBs). financial exclusion is often a symptom as well as a cause of poverty. the authorities modified the policy framework from time to time to ensure that the financial services needs of various segments of the society were met satisfactorily. the Lead Bank Scheme. and panchayats as business facilitators/correspondents. and micro and small enterprises deal entirely in cash and are susceptible to irregular cash flows. financial exclusion leads to social exclusion. post offices. First. contributes to a much wider problem of social exclusion. Financial exclusion is not evenly distributed throughout society. The organized financial system comprising commercial banks. a wide network of financial institutions has been established over the years. primary agricultural credit societies (PACS) and post offices caters to the needs of financial services of the people.
So far. UTI Bank and AP Grameena Vikas bank. banks were advised that they should provide adequate incentives to their branches for financing the SHGs and that the group dynamics of working of the SHGs may be left to themselves. In the case of SHGs. and (iii) banks urged to review their existing practices to align them with the objective of financial inclusion. PRIYANKA TANDON credit from various sectors of the economy and to determine the priorities for grant of loans and advances. Social control of banking policy was soon followed by the nationalization of major Indian banks in 1969. Andhra Bank.DR. a line of credit is provided to them giving flexibility. SINGH. when banks were advised to make available a basic banking 'no frills' account with low or nil minimum balances as well as charges to expand the outreach of 50 . SOME INITIATIVES STARTED BY COMMERCIAL BANKS TOWARDS FINANCIAL INCLUSION INDIAN BANK: The bank has established an exclusive microstate branch in Chennai for financial inclusion of lower income people who are also migrants form villages settled in different parts of the city by bringing large number of under privileged persons into the banking fold through the concept of SHGs. Viz SBI. while disincentivising those which were not responsive to the banking needs of the community. self-employed and those employed in the unorganized sector. ANURAG B. The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 mainly to provide refinance to the banks extending credit to agriculture. banks were advised that interest rates applicable to loans given by them to micro credit organizations or by the micro credit organizations to SHGs/member beneficiaries would be left to their discretion. It observed that there were legitimate concerns in regard to the banking practices that tended to exclude rather than attract vast sections of population. Subsequently. Subsequent to the Monetary and Credit Policy announcement for the year 1999-2000. with simplified accounting procedures. Union Bank. The process of financial inclusion received further impetus in November 2005. implicit or explicit. The immediate tasks set for the nationalized banks were mobilization of deposits on a massive scale and lending of funds for all productive activities. A special emphasis was laid on providing credit facilities to the weaker sections of the economy. the bank has established 198 KVCs all over the country. (ii) the nature. SBH. in particular pensioners. for updating them with the latest technological developments. which were set up in 1975 to cater. banks were advised in 1998 that SHGs that were engaged in promoting the saving habits among their members would be eligible to open savings bank accounts and that such SHGs need not necessarily have availed of credit facilities from banks before opening savings bank accounts. a pioneering effort has been initiated by Union bank of India by establishing Village Knowledge Centers (VKCs) at strategic rural locations. The objective of bringing financially excluded people within the fold of the banking sector received renewed emphasis in 2005-06 as the term 'financial inclusion' was explicitly used for the first time in the Annual Policy Statement for 2005-06. of basic banking services to the common person. shave recently been restructured. Pilot Project in Andhra Pradesh: Andhra Pradesh Government has embarked on a pilot project with six banks. It also indicated that the Reserve Bank would (i) implement policies to encourage banks which provide extensive services. UNION BANK OF INDIA-Village Knowledge Centers: Keeping in view the urgent requirement to educate the rural inhabitants and farmers in particular. scope and cost of services would be monitored to assess whether there was any denial. inter alia. to the credit requirements of the rural poor. to make payments of social security pensions and AP Rural Employment. RRBs. The bank proposes to open one more such specialized branch in Chennai and in 10 other metros and urban across the country. including the underprivileged. To further promote the SHG-bank linkage programme in the country.
Based on assessment of household cash flows. permitted banks to utilize the services of NGOs/ SHGs. They begin to appreciate the fact that the resources are limited and have a cost. and shows mature financial behavior. and use of the pooled resource to make interest bearing loans to the members of the group. which generally takes up to six months. In April 2008. the know your customer (KYC) procedure for opening accounts was simplified for those accounts with balances not exceeding Rs. The groups decide the terms and conditions of loan to their own members. In the course of this process. in association with insurance companies.000 and credit limits not exceeding Rs. Fifty per cent of GCC loans are treated as priority sector lending. In January 2006. innovative insurance products at affordable cost. the Reserve Bank. addressing the last mile problem. have also been extended by banks in various other countries with a view to making financial services accessible to the common man either at the behest of banks themselves or the respective Governments. Banks are encouraged to provide loans to SHGs in certain multiples of the accumulated savings of the SHGs. The simplified procedure allowed introduction by a customer on whom the full KYC drill had already been done. particularly to the low income groups. in some cases banks have provided. Banks are also entering into agreements with Indian Postal authorities for using the enormous network of post offices as BCs. In order to provide social security to vulnerable groups. much beyond their individual capacities. Besides the KCCs.3 The responsibility is given to the banks in the area for ensuring that all those who want to have a bank account are provided with one by allocating the villages to the different banks. In April 2008. They involve voluntary thrift activities on a regular basis. In order to ensure that persons belonging to low income groups. both in urban and rural areas do not encounter difficulties in opening bank accounts. banks were advised in 2005 to consider introduction of a General Credit Card (GCC) facility up to Rs. Banks find it comfortable to lend money to the groups as the members have already achieved some financial discipline through their thrift and internal lending activities. Interest rate on the facility is completely deregulated. thereby increasing their outreach. ex-servicemen and government employees as BCs. the SHGs need self-help promoting institutions 51 . SELF-HELP GROUP . The low cost or free of cost account is internationally considered to be helpful in expanding the access of banking services. The SLBC identifies one or more districts for 100 per cent financial inclusion. The BC model allows banks to do 'cash in .000 at their rural and semi-urban branches.BANK LINKAGE PROGRAMME An SHG is a group of about 15 to 20 people from a homogenous class who join together to address common issues.000 in a year. Under GCC. the limits are sanctioned without insistence on security or purpose. Similar types of accounts. MFIs (other than NBFCs) and other civil society organizations as intermediaries for providing financial and banking services through the use of business facilitator (BF) and business correspondent (BC) models.cash out' transactions at a location much closer to the rural population. The Reserve Bank is undertaking an evaluation of the progress made in these districts by independent external agencies to draw lessons for further action in this regard. though with different names. covering life disability and health cover. which were introduced in 1998. SHGs and MFIs are also being used extensively for financial inclusion on the credit side. the limits are sanctioned. they imbibe the essentials of financial intermediation and also the basics of account keeping.100. Once the group is stabilized.50.25. The peer pressure in the group ensures timely repayment and becomes social collateral for the bank loans Generally. subject to appropriate due diligence. it is considered for linking to banks. The credit facility is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned.FINANCIAL INCLUSION IN INDIA: AN ANALYSIS such accounts to vast sections of the population. based on the assessment of household cash flows. banks were permitted to engage retired bank employees. thus. SLBCs reported achieving 100 per cent financial inclusion in 134 districts in 18 States and 6 Union Territories (UTs) of the country. The members also learn to handle resources of size. Loans are given without any collateral and at interest rates as decided by banks.
respectively. participation and creativity. In order to obtain loans. The Government of Bangladesh has fixed interest rate for government-run microcredit programmes at 11 per cent at flat rate. Thus. ANURAG B. with an NGO acting as a facilitator and financing agency. GB has reversed conventional banking practice by obviating the need for collateral. Savings. the rule to borrow for one whole year. 5 per cent for student loans. seasonal loans. which amounts to about 22 per cent on a declining basis. There are four interest rates for loans from Grameen Bank: 20 per cent (declining basis) for income generating loans. the GB switched to individual lending recognizing that with repeated loan cycles and greater credit exposure. GB provides credit to the poorest of the poor in rural Bangladesh. It is owned by the poor borrowers of the bank who are mostly women. as opposed to consumption. and 0 52 . it was transformed into a formal bank under a special law passed for its creation. the branch-wise and zone-wise loan ceiling. accountability. fixed size weekly installment. These SHPIs include various NGOs. Model II: This envisages lending by banks directly to SHGs with facilitation by NGOs and other agencies. It offers credit for creating self-employment. or legally enforceable contracts. SINGH. i. self-employed individuals and federations of SHGs. namely personal savings account. farmers' clubs. The most distinctive feature of Grameen credit is that it is not based on any collateral. and more than a dozen other types of loans. while the group and the centre/branch oversee that everyone behaves in a responsible way and none gets into repayment problem. It is based on 'trust' and not on legal procedures and system. It also gave up the group fund. the group is not required to give any guarantee for a loan to its member. After operating group lending for 25 years. As GB was initiated as a challenge to the conventional banking. Grameen Pension Savings and credit-life insurance savings fund. bank should go to the people. PRIYANKA TANDON (SHPIs) to promote and nurture them. The repayment responsibility solely rests on the individual borrower. There are three different models that have emerged under the linkage programme: • • • Model I: This involves lending by banks directly to SHGs without intervention/facilitation by any NGO. In 1983. special savings account. even when the borrower needed the loan only for three months. It provides service at the doorstep of the poor based on the principle that the people should not go to the bank. GRAMEEN BANK IN BANGLADESH The Grameen Bank (GB) was launched as a project in a village of Bangladesh in 1976 to assist the poor families by providing credit to help them overcome poverty. New loan becomes available to a borrower if her previous loan is repaid. Model III: This involves lending. Although each borrower must belong to a five member group. family loans. while Models I and III accounted for around 20 per cent and 6 per cent. without any collateral. government agencies.. the more flexible Grameen II is more appropriate for reaching the poor because its products can be conveniently used for everyday money management as well as for microenterprises. banks. It has created a banking system based on mutual trust. 8 per cent for housing loans. There is no form of joint liability. GB II dispensed with the general loans. some SHGs have also been formed without any assistance from such SHPIs. a borrower must join a group of borrowers.DR. homogeneity of the group would weaken as loan requirements vary with variation in the levels of upliftment attained. it rejected the basic methodology of the conventional banking and created its own methodology. group members are not responsible to pay on behalf of a defaulting member. Loans can be received in a continuous sequence. All loans are to be paid back in installments (weekly or bi-weekly).e. income-generating activities and housing for the poor. The interest rate charged by the Grameen Bank is lower than that fixed by the Government of Bangladesh. However. Model II accounted for around 74 per cent of the total linkage at end-March 2007.
REFERENCES 1. 2010. With 2. Anshul Agarwal. In order to achieve the goal of total financial inclusion. Barik. Banks also could not succeed in reaching the poor society because of many reasons.B. 3. most of the Indians Banks were in government hands till the late nineties their employees were looking for a "salary". banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income groups treating it both a business opportunity as well as a corporate social responsibility. most of the people do not maintain proper records or books of accounts. "Financial inclusion and empowerment of Indian Rural Households". This implies an annual interest rate of 10 per cent for income-generating loan which is less than that (11 per cent) fixed by the Government of Bangladesh.574 villages.5 per cent to 12 per cent. CONCLUSION Access to financial services such as savings. 23rd Skoch Summit. "Financial Inclusion: Challenges and Opportunities". 97 per cent of whom were women. 3. 4.FINANCIAL INCLUSION IN INDIA: AN ANALYSIS per cent (interest-free) loans for struggling members (beggars). on banks to reach the poor. New Delhi. But government machinery suffered all the demerits of bureaucracy and corruption and hence. it had 7. 5. failed miserably. First. Bhaskarans. Problems and Challenges 1. Reserve Bank of India. NGOs and regulators have to work together. To sum up. Financial literacy is very low in India. banks. For example. he stills remains in the "stone age". 53 . As of March. Many college going students still cannot write cheques and a major part of white collar working class people need consultants to fill simple income tax returns. (2006) "financial Inclusion: What needs to be done?" Reading on Financial Inclusion. 2008. policymakers. insurance and remittances are extremely important for poverty alleviation and development.504 branches. 1000 in his account. 2. published by IIBF & Taxman. which means if a poor man opens a bank account. R. 2. 4. This leads to removing of these people from the financial services of the banks. In addition to cooperating with other stakeholders. This leads proper records or books of accounts. Due to financial illiteracy. the Government had been dependent on its machinery first and then. Basic financial literacy programs can help achieve better results in poverty alleviation. after nationalization. even the educated urban population is financially illiterate. GB provides services in 81. MFIs. "Report on financial Inclusion". GB offers attractive rates for deposits ranging from 8. All interests are simple interest. Second. covering more than 97 per cent of the total villages in Bangladesh. Since independence. B.46 million borrowers. Forget about BPL people. no bank will give a cheque book of ATM facility to a poor man unless he has a minimum of Rs. not for achieving the 'national target'. policymakers who believe that microfinance can help them to speed up financial education programs that allow their citizens to realize the economic potential of microfinance. calculated on declining balance method. banks have to follow certain rules which sometimes create bottlenecks in their targets of reaching the poor.
G. 11. 10. (2007): "Financial Inclusion: the Way Forward". Government of India. Reserve Bank of India. 2 December 2005. March. Chapter II-VI. Report of the Committee on Financial Inclusion in India (Chairman: C. Commemorative lecture. World Bank. United Nations Development Programme. HM Treasury. Paper for Access to Finance: Building Inclusive Financial Systems. Vol. May 8. No. "Taking banking services to the common man . 6. Washington. at the HMT-DFID Financial Inclusion Conference 2007. (2006): "Policy Level Response to Financial Exclusion in Developed Economies: Lessons for Developing Countries". UK. Readings on financial Inclusion published by IIBF & Taxman. 9. London. "Financial Inclusion". 14. Treasury. E. Tharot Usha (2007) "Speech on Financial Inclusion -The Indian Experience". Ranganatham. Kempson. Chakrabarthy. 54 . PRIYANKA TANDON 5.1 March 2010. SINGH. Scoping paper on Financial Inclusion. New Delhi.Financial Inclusion". ANURAG B. Report on Currency and Finance. Fedbank Hormis Memorial Foundation. (2010) "Assessment of Social Entrepreneurship: a Case Study of Grameen Bank in Bangladesh. V Leeladhar. Rangarajan) (2008)." SEDME. 12. 7.M. K.DR. Research Paper. and Hasmukh Savlani. NABARD. p 27-40. Ernakulum.C (2006) "Indian bank: A case study on financial Inclusion". H.31. 13.
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